Yardeni NAV

Tuesday, March 26, 2013

Don’t worry, there will always be something to worry about. Yesterday, I reflected on how well the bull market has weathered numerous Apocalypse Now crises over the past four years. Many of them actually seem to be abating, forcing apocalyptic market pundits to postpone the predicted end of their endgame scenarios. Most recently, I anticipated that the Cyprus Moment wouldn’t turn into Europe’s Lehman Moment. Sure enough, the Cyprus problem was resolved over the weekend.

But it didn’t take very many moments yesterday for the initial rally in stock prices to be reversed by really stupid comments from a top European official. Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times that when failing banks need to be bailed out, euro zone officials would force the bank's shareholders, bondholders, and uninsured depositors to contribute to their recapitalization. He also said that Cyprus was a template for handling the region's other debt-challenged countries. Financial shares were among yesterday’s losers, especially in France and Italy.

Mr. Dijsselbloem, who is also the Dutch finance minister, said, “Taking away the risk from the financial sector and taking it on to the public shoulders is not the right approach.” That makes a great deal of sense, in theory. In practice, his reckless comments could easily upset the relative market calm that he said allowed his group to force private investors and depositors to pay for the bailout of two large Cypriot banks.

ECB President Mario Draghi deserves all of the credit for calming Europe’s markets with his pledge to do whatever it takes to defend the euro at the end of July last year. He did it again just yesterday when the ECB gave Cypriot banks access to its Emergency Liquidity Assistance (ELA) facility. By Monday afternoon, Dijsselbloem attempted to retract his earlier remarks as he issued a statement: “Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.”

Wednesday, March 20, 2013

There has been a certain tendency for a spring slump that we have seen a few times. One possible explanation for that, besides some freaky things, some weather events and so on, one possible explanation is seasonality. Because of the severity of the recession in 2007 to 2009, the seasonals got distorted, and they may have led--and I say ‘may’ because the statistical experts, many of them, deny it--but it is possible they led job creation and GDP to be exaggerated to some extent earlier in the year. Our assessment is though, at this point, that we are far enough away from the recession that those seasonal factors ought to be pretty much washing out by now.

As Mr. Bernanke noted, many statistical experts deny that there has been a distortion at all. For example, two economists at the Bureau of Labor Statistics analyzed the problem in an article appearing in the October 2012 issue of Monthly Labor Review. After a careful and thorough analysis of the data, they concluded: “Removing the declines due to the 2007-2009 recession prior to seasonal adjustment in a number of experimental data series reveals that the recession did not create any bias causing a pattern of stronger increases in employment in the winter months of the fourth through the first quarter versus weaker increases from the second to the third quarter.”

Tuesday, March 19, 2013

Cyprus has been a safe haven for money-laundering operations. Russians have large deposits in the island's banking system. The tiny nation, which is one of the 17 members of the euro zone, has only 860,000 people, but the banks have €68.4 billion in deposits. The Germans are in no mood to bail out Russian depositors in Cyprus, which is why the initial bailout plan required a 9.9% wealth tax on large uninsured deposits. Small depositors were also hit with a levy.

Undoubtedly, the final deal will be amended to cushion the blow to small depositors. However, the latest mess in the Euro Mess is a reminder that Mario Draghi's pledge to do whatever it takes to defend the euro won't clean up the mess. The pledge bought time, which must not be wasted or the Euro Mess will last for years to come. The “Cyprus Moment” is yet another waste of time.

For now, the euro zone is falling deeper into recession, as evidenced by the region's weak production numbers during January (Fig. 1). The UK is heading in the same direction (Fig. 2). The question is how long will the Cyprus Moment last, and will it morph into Europe's Lehman Moment? I doubt it. So far, government bond yields for both Italy and Spain remain subdued (Fig. 3). I don't expect that TARGET2 payments will show outflows from these two debt-challenged nations to Germany as a safe haven (Fig. 4).

Monday, March 18, 2013

This past weekend, euro zone finance ministers agreed on a shocking bailout plan for Cyprus. It requires bank accounts with balances above €100,000 to be taxed at 9.9%, while those with less will be taxed at a 6.75%, to raise €5.8 billion for the near-bankrupt nation. This marks the first time in the euro zone crisis that depositors in the bloc's banks will lose money. This unprecedented move to make depositors contribute to a bailout is stoking fears of deposit runs hitting all fragile euro zone banks.

I don’t expect this “Cyprus Moment” will turn into a Lehman Moment for the euro zone. However, the plan could shatter the calm in the euro zone following the pledge at the end of last July by ECB President Mario Draghi to do whatever it takes to defend the euro. The only upside is that we won’t have to worry about irrational exuberance until this latest mess in the Euro Mess is cleaned up.

Monday, March 4, 2013

Japan’s new Prime Minister Shinzo Abe has chosen Haruhiko Kuroda to be the next governor of the Bank of Japan (BOJ). Once he is approved by the Diet, the new governor is expected to push for unlimited QE to start immediately rather than in 2014. The goal is to reflate the economy with a target of 2% for the inflation rate (Fig. 1). The BOJ’s Policy Board is scheduled to hold its first meeting under the new leadership on April 3 and 4.

The question is: Will Abe’s new fiscal and monetary stimulus programs be any different than the same old tired Kabuki of the past two decades? The fact is that we’ve seen this play several times before with the same unhappy ending. Numerous Japanese governments have resorted to such measures to boost growth rather than implement much-needed economic reforms. Nominal GDP has been virtually flat (up only 0.6%) since Q1-2009, with real GDP up 7.3% (over the entire period!) and the GDP deflator down 6.7% (Fig. 2). The Nikkei is up 34% since November 13, 2012, and the yen is down 15.2% over the same period (Fig. 3and Fig. 4). However, swings of this magnitude have occurred in the past since 1990 without any significant improvement in the performance of the economy.

Search

Translate

About: This blog tracks the latest developments in the Federal Reserve System and the other major central banks. It aims to inform the public about global monetary policy. This blog is a companion to The Fed Center website, which provides an extensive updated library and archive of related resources.